In good times and in bad. In sickness and in health. In Bull and Bear markets. Wall Street gets paid, no matter what. The people who manage your money, and most critically, your retirement, get their 1 or 2 percent every year. Even when you lost one-third of it, as you did during the past recession.
I’m very hard on Wall Street, and for good reason. America’s method to prepare people for old age is insane. Give 10 percent of the money you make every year to people in lower Manhattan who bounce it around to each other like they are playing ping pong, siphoning off a tiny percentage with every volley. They pile up the cash and buy homes in the Hamptons. Maybe you are lucky and retire when the market is up and you think this is great. Maybe you retire in a down market and you curse every man in a white shirt you see.
There’s no denying the data. Wall Street and financial fees are probably eating up about one-third of the money you should have for retirement. I say this often, and I think most people just don’t believe it because the truth is just so harsh. But it’s been calculated hundreds of ways. Here’s one, from Demos. Here’s John Bogle, father of Vanguard, explaining how “the tyranny of compounding costs” could actually eat up 80 percent of your retirement money on PBS.
Finally, something is being done about this. Today, after a six-year laborious process, the Department of Labor has changed the rules for people who dole out investment advice. In short, they can no longer nudge or shove people into investments that make the advisers rich and the savers….not so much. Advisers will now be legally bound to do what’s best for investors/consumers. In financial jargon, this is called a “fiduciary” standard. This is a great step, and of course, one that many in the financial industry fought.
It won’t end the tyranny of compounding fees. Savers will still struggle to even find, let alone calculate, the money they are losing (roughly 1 percent every year) by picking managed mutual funds in their 401(k) accounts, and so on. But at least the market for the really awful, fee-ridden products, such as dastardly-designed annuities, should begin to dry up. And hopefully, in the future, you will be able to trust financial advisers more, as they will no longer be able to dole out economically biased advice.
Most critically, the rule applies to people who roll over investment accounts — often when they move workplaces. That’s when consumers are most vulnerable, and unsavory advisers make the most money.
“While we will conduct a more detailed analysis of the rule over the coming days and weeks, our initial review indicates that the rule is a huge win for consumers,” said Consumer Federation of America Financial Services Counsel Micah Hauptman. “It appears that the rule properly closes the loopholes in the current rule so that financial professionals can no longer evade their obligation to serve their customers’ best interest, appropriately applies to recommendations to roll over to an IRA, which is often the time at which retirement savers have the most money at stake and are most vulnerable to being preyed upon, and has a strong, legally enforceable best interest standard backed by requirements for firms to rein in toxic and often perverse compensation practices that reward financial professionals for working against their customers’ best interests. As a result, this rule will lead to better outcomes for retirement savers and bring them one step closer to a secure and dignified retirement. ”
To be sure, there are and have always been honest financial advisers who do what’s best for their clients, even if it’s not best for the adviser’s bank account. As I say often about Gotcha Capitalism, rules like this favor honest businesses, and they should be cheering right along with consumers. Many are. (See this ‘reaction’ page from WSJ.com.) In fact, outside of a noisy bit of “Obama is hurting America” misdirection from folks like Dave Ramsey (who suggested the rule might force financial gurus off the air. If only), opponents of the fiduciary rule are going about their business quietly right now. Watch out for that. Some lawsuits are inevitable.
But for now, even if you still don’t understand what a fiduciary is, cheer that something has finally been done to at least partly address the horrible redistribution of wealth from workers old folks who just want to retire comfortably and to fast-talking financial salesmen and women.
“Average Americans who scrimp and save to afford an independent and secure retirement should be able to trust that the financial professionals they turn to for advice will act in their best interests,” said CFA Director of Investor Protection Barbara Roper. “For too long, however, loopholes in the regulations governing advice to retirement investors have denied workers and retirees that basic protection at a cost of billions in diminished retirement savings. We applaud the DOL for persisting in the face of relentless and well-funded opposition to deliver this much needed market reform.”
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